Government says it is levelling the electricity playing field for power consumers

Business

Electricity market changes include big power companies having to sell electricity at 'affordable' rates into wholesale market and extending discount pricing rates to all power customers; 'backstop legislation' will allow Govt to regulate when necessary

3rd Oct 19, 12:00pm by admin

Energy and Resources Minister Megan Woods has announced electricity market changes that she says will see consumers will benefit - with "a level playing field "for smaller independent retailers, greater transparency over the big power companies, increased competition in the market and more support for consumers to shop around for better deals.

The changes include requiring big power companies to sell electricity at affordable rates into the wholesale market to level the playing field for smaller and independent retailers.

This is just one of the changes included in the Government’s response to the Electricity Price Review. The Government has agreed to a work programme that will see 20 of the Review’s recommendations progressed immediately.

The final Electricity Price Review report is available here.

The 20 recommendations being progressed are available here.

“Helping Kiwi families meet the cost of living is a long term challenge for New Zealand. We can’t fix it overnight or in one fell swoop, but there are a range of practical things we can do to tilt the balance in favour of consumers while adding more competition to the marketplace to take pressure of the monthly power bill,” says Megan Woods

“Right now, our electricity system is dominated by a small number of big ‘gentailers’ -companies that generate and sell electricity. It can be too hard for small and independent retailers to compete and survive, meaning fewer choices for consumers and less innovation in the market. We are changing the market to level the playing field and boost competition.

The changes announced on Thursday include:

Supporting new and independent retailers by requiring the big power companies to sell into the wholesale market at affordable rates.
Extending discount rates to all customers
A pilot scheme to help customers who have not switched power providers before to shop around for better deals and requiring power companies to put information about how to switch on the communications they send consumers.
Putting a moratorium on “win-backs” that companies use to stop customers switching between providers.
Requiring greater transparency on the profits of the big gentailers.
Introducing minimum standards for medically dependent and vulnerable customers

“The EPR found that while overall the market is working well, it is not delivering for everyone. Too many people are paying higher bills than they need to and many people struggle with the cost of power, Megan Woods said.

“Our programme will also reform the electricity sector to make it fit for the future – giving consumers better access to emerging technology and increasing New Zealand’s investment in renewable energy.

“We’re also putting the industry on notice - we intend to review these changes in our second term to ensure savings are passed on to consumers. We will be passing backstop legislation shortly to allow the Government to introduce regulations directly when required.

“We will also be requiring retailers to follow Meridian’s lead and change pricing structures to pass discount rates onto all customers instead of relying on hidden late payment penalties. When Meridian did this, it put $5 million back into the pockets of consumers, and the EPR estimates that $45 million would come off power bills when other companies follow suit.

The Electricity Price Review was agreed in the Coalition Agreement with New Zealand First.

Under Secretary for Regional Economic Development Fletcher Tabuteau said, “As the New Zealand First energy spokesperson and Under Secretary for Regional Economic Development, I am pleased to see the review has produced key recommendations to steer our future energy sector.

“New Zealand First has long held a strong belief that electricity, an essential service, must be delivered to all New Zealanders at the most reasonable price that is consistent with the maintenance of a viable industry.

“As a result, New Zealand’s future energy regulatory structure will provide long-term stability and incentives for business to make informed investment and purchasing decisions while ensuring that the needs of every New Zealander are met.”

Minister Woods said, “The changes we announce today sit alongside other actions to help with the cost of living such as the Winter Energy payment to help over a million people heat their homes, the Warmer Kiwi Homes programme which insulates homes to bring down heating costs, giving $75 a week to the average family through the Families Package, increases to the minimum wage, and our economic plan which has delivered the highest wage growth in a decade.”

This is the National Party's statement in response:

The Government’s response to the Electricity Price Review has failed to deliver meaningful savings for New Zealanders struggling with the rising cost of living, National’s Energy and Resources spokesperson Jonathan Young says.

“It is not good enough that the Government has failed to identify how much, if anything, these changes will reduce New Zealanders’ electricity bills by every year.

“Most of the changes merely tinker around the edges of the electricity market and won’t undo the damage caused by the Government’s failed energy policies.

“Some changes seem perverse and poorly thought through, such as removing prompt payment discounts while retaining late payment fees, which will punish people who pay their bills on time. These discounts can reduce electricity bills by up to $600 a year for the average household.

“The reckless decision to ban new oil and gas exploration will also increase weekly power prices for New Zealanders, increase global carbon emissions and risk our energy security.

“New Zealand already has one of the most renewable electricity markets in the world but the Government is pushing for 100 per cent renewable, which will see overinvestment in generation and could increase electricity costs by $300 a year for the average household.

“Despite initiating this review, there is no indication that New Zealand First is delivering on its election promises of restoring public ownership to Mixed Ownership Model gentailers, cancelling the transmission pricing methodology or transferring regulatory functions from the Electricity Authority to the Commerce Commission.

“National supports a competitive electricity market that is affordable, secure and reduces carbon emissions in the most efficient way possible.

“That is why we support some of the changes, such as greater transparency for the vertically integrated gentailers, improving liquidity in the electricity futures market, community level support for those in energy hardship, reducing barriers for consumers to switch retailers and removing the low fixed charge.”

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32 Comments

by Audaxes | 3rd Oct 19, 12:12pm 1570057942

The 30-year power price hike

Bertram said that for several years, power companies were revaluing their assets on paper and using that as a basis to increase their prices.

A profitability analysis of Meridian, Genesis and Mighty River conducted by Ernst and Young in 2011 estimated that economic profit totalled $3.8 billion between 2002 and 2011, on total revenues of $42 billion.

Their invested capital rose from $4 billion in 2002 to nearly $12 billion in 2011 but most of this increase - $6.2 billion, according to the companies' annual reports - was asset revaluations, with less than $2 billion representing the historic cost of net actual investment.

Those increases in asset values went untaxed but made their returns on investment look low, which justified price hikes, he said.

by Audaxes | 3rd Oct 19, 12:49pm 1570060188

Further investigation is in order in respect of rising consumer liability costs caused by a never ending stream of OCR cuts executed by the RBNZ. Since June 2008 the rate has been cut in half three times. Some claim liabilities double every time rates are cut in half.

In March 2017, former Treasury and Federal Reserve (Fed) official, Peter R. Fisher, delivered a speech at the Grant’s Interest Rate Observer Spring Conference entitled Undoing Extraordinary Monetary Policy.

Wealth effect or wealth illusion? The other therapeutic effect of lower-for-longer interest rates is the wealth effect. By driving up the value of future cash flows with lower rates of interest, all manner of assets – stock, bonds, and houses – increase in value and, thereby, can stimulate our marginal propensity to consume. More simply put, the imperative was to make rich people richer so as to encourage their consumption. It is not so hard to imagine negative side effects.

There are the obvious distributional effects between those who have assets and those who do not. Returning house prices in California to their 2005 levels may be good for those who own them, but what of those who don’t?

There are also harder-to-observe distributional consequences that flow from the impact of lower-for-longer interest rates on the value of our liabilities. This is most easily observed in pension funds.

Consider two pension funds, one with a positive funding ratio and one with a negative funding ratio. When we create a wealth effect on the asset side of their balance sheets we also drive up the value of their liabilities. Lower long-term interest rates increase the value of all future cash flows – both positive and negative. Other things being equal, each pension fund will end up approximately where they started, only more so.

The same is true for households but is much more ominous, given the inequality of wealth with which we began the experiment. Consider two households: one with savings and one without savings. Consider also not just their legally-defined liabilities, like mortgages and auto-loans, but also their future consumption expenditures, their liability to feed and clothe themselves in the future.

When the Fed engineered its experiment to promote the wealth effect, the family with savings experienced an increase in the present value of their assets and also an increase in the present value of their liabilities. Because our financial assets are traded in markets and because we receive mutual fund and retirement account statements, we promptly saw the change in the value of our assets. We are much slower to appreciate the change in the present value of our liabilities, particularly the value of our future consumption expenditures.

But just because we don’t trade our future consumption expenditures on the stock exchange does not mean that the conventions of finance do not apply. The family with savings likely ends up where they started, once we consider the necessity of revaluing their liabilities. They may more readily perceive a wealth effect but, ultimately, there is only a wealth illusion.

But what happened to the family without savings? There were no assets to go up in the value, so there is no wealth effect – real or perceived. But the value of their future consumption expenditures did go up in value. The present value of their current and expected standard of living went up but without a corresponding and offsetting increase in assets, because they don’t have any. There was no wealth effect, not even a wealth illusion, just a cruel hoax.

by kiwimm | 3rd Oct 19, 1:34pm 1570062890

It's a great business model if you can get into it - have taxpayers build assets, revalue these every year and charge the taxpayers more for the asset they paid for.

by waymad | 3rd Oct 19, 3:20pm 1570069255

Read the ComCom guidance on revaluation of assets. Revaluation of assets is a regulatory requirement to ensure that companies don't understate the depreciation needed to replace assets as they pass their use-by dates.

The Commission considers an overall value variance of more than 3% (including any unadjusted variance arising from the economic value assessment part of the ODV methodology) to be material. This level of materiality is to be taken into account by the auditor in their report on the ODV valuation report and by the directors of the ELB in their certification of the ODV valuation report, as may be required from time to time in relation to Part 4A of the Act.

EDIT - added source URL.

by Hamish | 3rd Oct 19, 2:24pm 1570065870

by murray86 | 3rd Oct 19, 1:08pm 1570061314

Maybe someone can answer a question; years ago I read an article that identified a major power company (Genesis I think) had to borrow money to pay the dividend required by the Government. From memory this stems from the legislation put in place by the National Government that privatised the power sector, but mandated that each power company MUST pay an annual dividend to the Government. Is this still true?

If so then the real, and final, solution to this problem is for the Government to buy all the shares back, and direct that the power companies are not to make profits, but are only to develop income to pay their costs, maintain infrastructure and future proof power generation, distribution and supply to support the economy.

The current situation is the result of the crock the national Government sold to the public (Bill English being significant in this if I remember correctly) that supposedly promised lower prices, but in reality never delivered.

by Believer1980 | 3rd Oct 19, 5:06pm 1570075565

The Crown still owns more than 50% of shareholdings of all these companies. So they have absolute control over all of them. I dont think they need a law to determine the dividend policy of these companies, as they can do it more easily by virtue of controlling the board. Am I wrong?
Also, to the best of my knowledge, NZ power has three components (generally speaking), the generation is 51% crown 49% private (so Crown controlled), distribution is 100% Crown (Transpower) and distribution that is open to everyone (however the major distributors are the same companies who are the main generators). So NZ electricity market is not "privatised" in any real form.
The problem is politicians do not represent their actions in an honest and straightforward manner. National was misleading by saying that selling a non-majority stake to the market will make electricity cheaper to give a false "pro market" signal. Labour has been misleading by scaremongering that the electiricty generation is "privatized" to make people angry to give a different false signal to people.

by murray86 | 4th Oct 19, 8:05am 1570129543

If memory serves, the amount borrowed to pay the dividend was in the vicinity of $300 million - so on the basis of what you have identified, would it be legal for an owner to force a company to pay a dividend if they hadn't made that much profit?

by Believer1980 | 4th Oct 19, 9:54am 1570136058

It case of companies, board of directors can approve a dividend. Dividends are generally paid out of accumulated profits. In many cases, a company liquid assets is only a fraction of its accumulated profit (in case of power companies, most of their assets are in form of long term power plant assets). So while they have the accounting accumulated profits to distribute, they do not have the cash on hand to pay it. Thus they will need to borrow money to pay dividend. It is a very common practice in the corporate world.

At end of the day this is a capital structure decision (and share price consideration) for a company and its shareholders. I guess, given that the Crown can not sell any more of its shares without losing its control over the company, they are going for an aggressive dividend policy (as not paying a dividend may increase share prices but that is no good to the government). But it is entirely up to government as the majority shareholder with 51% of the voting right to make this decision. So if Labour believes that it is better to retain the accumulated profits in these crown controlled companies, it can easily achieve it. How a government treats its more commercially oriented enterprises is entirely up to the government of the day.

by kiwimm | 3rd Oct 19, 1:31pm 1570062695

One of the recommendations listed is to phase out low fixed charge tariff regulations. This will see lower users end up paying more. It will also disincentivise installation of solar. The standard $1.50/day fixed charge is $547.50 per year - you would need to sell about 7000kWh/year just to negate this. Last year my 5kWp system sold 5200.

Removing all fixed charges would give a better incentive to reduce energy usage.

by dictator | 3rd Oct 19, 1:56pm 1570064199

The Government has decided to do this just as I've installed solar. I'm a low power user without solar and the Government wants me to pay more for placing less demand on infrastructure? This is completely broken. We need to be clear in describing this change as a solar tax, and is intended to drive higher power use and place more demand on coal and gas generation. A really green move by the Government.

e: One of the things that has always bothered me about the low power user is that the daily charges and per kWh charges end up creating a higher total cost. So those using less power are always paying disproportionately more than high power users. If the market making does not address the ridiculous charges then this will serve to increase costs for low users even more.

by Roger the dodger | 3rd Oct 19, 3:27pm 1570069662

Don't worry, that won't happen. It's just another Winston setup job.
It will obviously hit the elderly - his people. So when they kick up a stink about it he will chop that part out.

The Greebour party will accept it to save face. Job done.

by Roger the dodger | 3rd Oct 19, 3:27pm 1570069662

Don't worry, that won't happen. It's just another Winston setup job.
It will obviously hit the elderly - his people. So when they kick up a stink about it he will chop that part out.

The Greebour party will accept it to save face. Job done.

by The Person | 3rd Oct 19, 10:30pm 1570095015

what makes you think solar puts less demand on infrastructure? How does your solar power get transported to consumers? And how much more peak only generation will the country need to cover your peak usage on winter morning and evenings when the solar ain't producing?

by waymad | 4th Oct 19, 7:46am 1570128418

Depends entirely on the particulars of the solar rig. In our own case, we have 4.8kWp on the roof, a 9.8kWh 400v battery which is charged on night rate and which covers the morning peak, and the insolation over midday tops up the battery, handles the day's house load, and covers the evening peak. So effectively, this configuration shifts both morning and evening peaks to the night, where, as you have most perspicaciously observed, the sun don't shine. Effect on grid: no major peaks and no covering generation needed, plus better utilisation of night generation where, in any case, spinning synchronised generators have to be present anyway to maintain grid frequency and voltage stability. Because neither wind nor solar can supply that stability, as SA found out in September 2016.

by Roger the dodger | 4th Oct 19, 10:59am 1570139985

You are right, and you also have described the solution - grid connected batteries.
Just do it at grid scale. Residential scale is fine, but it isn't the most cost effective.

SA installed them, and they are making money and preventing blackouts.
https://www.theguardian.com/technology/2018/sep/27/south-australias-tes…
https://reneweconomy.com.au/how-the-tesla-big-battery-kept-the-lights-o…

by kiwimm | 4th Oct 19, 11:51am 1570143106

Better to grid connect your electric car overnight to do the same - called Vehicle to Home (V2H). It is inefficient to install a house battery when a bigger one is sitting unused in the garage.

Some countries are also taking this further by paying to use your cars battery at peak periods (Vehicle to Grid, V2G). You charge overnight at a low rate then sell back during morning/evening peaks. Turns your car into a profit centre.

by The Person | 4th Oct 19, 12:12pm 1570144346

Oh absolutely, such a solar battery setup does indeed reduce demand on infrastructure.

If it wasn't so damn expensive, more than a tiny fraction of solar installs might install it, but for most, it's prohibitively expensive, much cheaper in both the short and long term to get your power from the grid.

by kiwimm | 4th Oct 19, 11:55am 1570143337

Solar users still pay transmission costs (in both directions). My house is also a certified Passive House which uses about a third of the energy of a typical home.

Excess solar generation during the day can be used to store energy for other times - via batteries, hydrogen or pumped hydro.

by The Person | 4th Oct 19, 1:25pm 1570148756

"Excess solar generation during the day can be used to store energy for other times - via batteries, hydrogen or pumped hydro."

Sure, one day in the distant future when the technology is available and/or not prohibitively expensive

by Pragmatist | 3rd Oct 19, 3:56pm 1570071401

Just looked at my power retailers charges low user fixed charge of 37.5c/day. Multiplied that out by 365 days and added GST, and it was about $160.. thats less than half the Entrust dividend we received the other day. If we had a solar system and drew almost no power they'd be paying us for having a connection, as it is I suspect we are effectively getting our connection for free, as we don't use a lot of power so the higher per unit charges probably suck back the rest of that dividend payment.

by Hamish | 3rd Oct 19, 2:02pm 1570064552

So it's a done deal then is it? Oooooh the arrogance...
“We’re also putting the industry on notice - we intend to review these changes in our second term to ensure savings are passed on to consumers"

by theglc | 3rd Oct 19, 3:36pm 1570070210

This is actually great news !

Power winback offers are rampant and excessive and end up being subsided by all other users

by The_4th_estate | 3rd Oct 19, 4:17pm 1570072672

Is no government brave enough to repudiate the neoliberal status quo? This set of 'changes' is bullshit on wheels. Nationalise the whole thing and get renewables moving, the sector is too disjointed to do it by itself. Then we can have the true cost of electricity revealed for all to see and build the smart grid that Jerry Brownlee killed of when the nutty nats got into govt in 08.

by Believer1980 | 3rd Oct 19, 5:12pm 1570075943

Am I wrong that NZ government still holds 51% of voting rights of all power generating companies (i.e. full control"), the lines are owned by Transpower (another Crown entity). So how electricity market in NZ is neo-liberal? I am not saying that it should be, just how a sector that is effectively under the absolute control of the government a Neo-liberal example?

by The_4th_estate | 3rd Oct 19, 5:26pm 1570076788

Dig a bit deeper. Because by design of the bradford reforms much like the RMA its the complexity that works in favour of those with the private holdings, the electricity sector is not at all under govt control infact its barely IN CONTROL at all. If you take one example, Infratil which owns Trustpower which has an enormously profitable carve out in the BOP, and is a gentailer as well. No government control over what profit they make. No point having 51% of anything when your dividend effectively cripples the business...

by Believer1980 | 3rd Oct 19, 5:58pm 1570078707

Trustpower does not have any crown ownerhship. Contact Energy is the same. Fully private. Government will have no control over them including on how much dividends they pay. These private companies still have to comply with relevant regulation though.

Genesis, Meridian and Mercury are all 51% or more owned by the Crown. They generate more than 60% of all NZ power. Do you mean that the Crown does not control the dividend policy of these companies? can you explain to me why this is the case? How a 51% ownership of these companies is not effective control over them? are there any specific arrangements that apply other than a normal listed company arrangement?

Also New Zealand’s national transmission grid is owned and operated by Transpower, a state-owned enterprise. So NZ government is in full control of distribution and is the majority player in generation (and retail too). Retail is not a key component of the equation (in terms of its impact on price and stuff) anyway. All the reform has done is allowing some competition (in terms of full private ownership of some NZ Power generating plants) but not to the extent that challenges NZ government dominance. (i think it would have been unwise to do it otherwise, as there are significant national security considerations beyond the price you pay for electricity).

Electricity is government owned effectively. It is very hard to sell it "private capitalist blood suckers" phenomenon like fuel companies. If it has failed, it is the government who has failed. If it is successful, it is government who is successful.

by a watchman | 3rd Oct 19, 4:18pm 1570072728

When are the powers that be work out it is the LINES COMPANIES that charge the most. In our case 60% of the total account. There is no mention of that part of the market. Thanks Bradford.

By the way Powerco on 1 April 2019 increase their night-store heating rate by 566%.

Well done to them.

by bob cotton | 3rd Oct 19, 7:12pm 1570083136

Good point. Politicians aren't the smartest. Bradford was one of the worst. We'll still suffer from the social effects of what she did.

by Pragmatist | 3rd Oct 19, 7:36pm 1570084618

She? Poor bob, so frothy at the chance to criticise the lefties that he's mistaken watchmans' comment about Max Bradford, the national party MP, and former national party CEO that was Minister of Energy back in the 90s with Sue Bradford..

by pankers | 3rd Oct 19, 9:03pm 1570089816

Contact offer fuel discounts I pulled out that as my power went up more than discounts both contact and genesis have Dual fuel discount for gas and power , hope this go's as I don't have gas
I have been with both of these companies very arrogant ,I have found Meridian very helpful , I hate direct credits I like to see my bill and do internet banking and you have the Kiwi Electrics that want paid weekly

by Pietro | 4th Oct 19, 1:21pm 1570148467

Is it really so bad? There's lots of companies and you can shop around. This latest set of changes seems mad to me. It will punish low users (ie the elderly), people who are doing their bit to fight climate change by having solar, and reward large, profligate families who can't be bothered to use the tools at their disposal to manage their bills. The solar thing will be an issue, though, and I predict there will be a compulsory increased buyback or some subsidy. Otherwise, the whole 'climate change is the biggest threat facing mankind' sort of falls flat on its face.